Lemonade’s decision to acquire struggling pay-per-mile auto insurer Metromile, along with a loss ratio that spiked higher, initially drowned out news of otherwise encouraging results from the company’s 2021 third quarter.

The New York-based digital insurer continued to grow its customer base, earned premium and premium per customer, though losses grew. Lemonade has regularly lost money as it scales operations nationally and overseas.

Before the Metromile M&A announcement and Q3 earnings disclosures on Nov. 8, Lemonade’s stock was above $70.The price dropped more than 10 percent a day later, hovering around $62 per share through Thursday before partially rebounding to $66.90 in late afternoon trading.

Lemonade will buy Metromile in an all-stock transaction with a full diluted equity value of about $500 million, or just over $200 million net of cash. The company said Metromile will instantly give it national reach in auto insurance. That may be, but investor reaction appears to be negatively viewing the transaction as money that would have been better spent elsewhere, according to Matteo Carbone, director of the IoT Insurance Observatory and a board member of Net Insurance.

“The real issue is that with $500 million you could buy a small insurance carrier that is profitable, not one that loses hundreds of millions a year adding to Lemonade’s losses,” Carbone said.

He argued that Lemonade’s rationale of pursuing the deal to tap into Metromile’s telematics prowess and multiple state auto insurance licenses only goes so far, because they “are all things that could have been obtained for a fraction of that cost.

“Like in many of their initiatives,” Carbone added, “there is a lot of nice storytelling rather than business rationales.”

Lemonade’s Q3 result highlights:

  • On the plus side, Lemonade’s customers as of the third quarter came close to 1.4 million, versus 941,313 in the 2020 third quarter. It’s premium per customer reached $254, versus $201 last year as Lemonade continued shifting its business mix toward products with higher average policy values and more customers had multiple policies.
  • Additionally, gross earned premium grew to nearly $80 million, compared to just under $43 million in the same, year-ago quarter.
  • In-force premium jumped to $346.7 million, an 84 percent rise over the previous year due to the large jump in customers and a 26 percent jump in premiums per customers.
  • Net losses for Q3 were $66.4 million, or negative $1.08 per share, versus a nearly $31 million net loss, or negative $0.57 per share in the 2020 third quarter. The company has lost $177 million through the first nine months of 2021.
  • Lemonade said its Q3 “gross loss” ratio was 77 percent, up from 72 percent a year ago, though it insists new products are generating improving loss ratios.
  • Lemonade’s business mix is now 53 percent renters insurance, versus 70 percent a year ago. The difference includes home and pet insurers, which have higher (but improving) loss ratios than the company’s “more mature, stable renters book.”
  • Operating expenses jumped nearly 100 percent to $82.4 million in the quarter, versus $41.6 million the previous year, due to ramp up costs in sales and marketing, technology development, and higher staff count/overhead to support continued growth.
  • Lemonade reported $1.1 billion in cash on hand as of Sept. 30, 2021, versus $578 million at the end of 2020, stemming mostly from net proceeds of a $640 million follow-on offering. This was partially offset by nearly $95 million in cash used in operations.

Source: Lemonade